The full impact of Open Banking and PSD2 (The Second Payment Services Directive), which came into effect on January 13 of this year, is yet to be seen. There has been much talk about delivering greater choice to customers by exposing incumbent banks to competition from a new range of accredited service providers—but with only four out of nine banks in the United Kingdom so far complying with the legislation, there’s still some way to go.
Of course, even once fully up and running, customers will still need to be convinced of the value of sharing their data with new providers. But in the same way that digital has disrupted the way products and services are bought and consumed across industries from retail to travel, we can be certain that banking and payments, too, are on the cusp of a dramatic transformation.
How can banks prepare?
It’s becoming clear that while some banks are taking a proactive approach and looking to seize the opportunities presented by PSD2, others are being more cautious and focusing primarily on the compliance aspects. Adopting a “wait and see” approach to assess if anything really changes is a risky and short-sighted strategy. While it will, of course, take time for Open Banking to fully take off, it would be wrong to expect things to simply continue with business as usual over the long-term.
Banks must move beyond mere compliance and view PSD2 as an opportunity to ensure their relevance in the ecosystem. They should be looking at new, innovative ways to monetize products and services that arise as a result. They have to cultivate partnerships when appropriate so that they can continue to “own the customer relationship”, while allowing customers to consume third-party products and services through their existing banking interfaces or online apps. In truth, the consumer has no interest in “who” does “what”, as long as it’s intuitive, seamless and secure. It is here that banks will need to do everything they can to support and reassure consumers, and ensure they are protected from “potential exploitation”, as appropriate.
For example, it is predicted that the uptake of new direct payment offerings from a range of new payment service providers (PSPs) will result in a 37-percent decline in card transactions. It is also anticipated that some 20 percent of online transactions will be made by mobile devices in 2018—this will cause an onslaught of data requests into banks. Peak traffic and payment requests will potentially be while consumers are on the train to or from work, or even just past midnight on Sunday mornings (as seen in Sweden with Swish) as opposed to the traditional timings and methods. Old ways of working will effectively be “turned on their heads”—and banks need to build in the agility to adjust quickly to changing customer needs.
The banking community also needs to invert its current concern that exposing its core to third-party providers to share data will leave it at a disadvantage. In fact, these banks could also act as third-party providers themselves, benefitting from access to another bank’s or provider’s data.
Banks that are able to harness technologies such as artificial intelligence (AI) and predictive learning tools to deliver more personalized and tailored service to customers based on the wealth of data they share will be best positioned to succeed.
Impact across all business lines
As Open Banking takes off, the lines will start to blur—with the expectations of corporate customers rising just as fast as their retail counterparts’. The implications of PSD2 and Open Banking are far-reaching across all areas of business. The possibilities for change are almost limitless. Some examples include:
Predictive FX (foreign exchange) services and FX bulk-buying—with developments in IoT (Internet of things) and AI fueling real-time trades/spreads and catering to both manual and automated trading.
Order management that allows complete initiation services (both from small/medium-sized enterprises and corporates) as well as transformation from any format and straight-through processing.
Cash and liquidity services that include balance reporting (for the AISP, or Account Information Service Provider), sweeping/pooling services, forecasting and account reconciliation.
Information-messaging services that include requests for pay, addressing and aliases and remittance information.
Collaboration and open APIs
It is in the interests of both the incumbent banks and the new entrants and payment service providers to collaborate. For the PSP, it’s about gaining access to a bank’s established customer base; while for the bank, it’s about delivering greater choice and flexibility to customers. It’s also about having the agility to capitalize on new, possibly unforeseen opportunities and ensuring they are viewed as innovators.
Previously, banks developed everything in-house or heavily customized procured services to make them proprietary. The focus has now changed to how, working together, banks and fintechs can add value and drive change.
The requirement to be agile is not a new concept, but it’s all too frequently perceived as a destination rather than a continuous journey. Growing API (application programming interface) acceptance and adoption by the banking community over the past 18 months are helping to accelerate this. And the effective use and development of API libraries will be essential in enabling all parties to tap into new revenue streams swiftly and adeptly. But a paradigm shift in culture is paramount to ensuring continual momentum.
Many of today’s incumbent banks are still operating in business silos with little crossover across business lines. Along with developing APIs that allow them to connect with third parties in the outside world, they should also look at applying the same approach to bursting through these silos and creating fully integrated back offices. In doing this, they will realize their own internal value-added, which in turn can be delivered back to their client bases in the form of better service and tailor-made products.
Time to take action
We cannot underestimate the challenges banks face today in adapting to Open Banking and PSD2. The fact that, at this stage, Finastra still has some banks asking for a one-size-fits-all “PSD2 solution” demonstrates that many in the industry don’t yet fully realize the far-reaching impacts of the regulation across all areas of their businesses.
Of course, timelines have been tight. The European Commission published its FAQ (frequently asked questions) on PSD2 only the day before the January 13 launch. And certain aspects of compliance, including strong customer authentication and standards for secure communication, won’t now come into effect until September 2019.
But while PSD2 may be off to a slow start, and we still have some time before the full impact of the regulation will be realized, banks must adopt a mindset that allows them to make the most of the “new order”, whatever that may be. A lack of initial public understanding didn’t prevent innovators such as Jeff Bezos or Elon Musk from articulating and achieving their visions. The same will happen in financial services. Don’t risk being left behind because the traditional ways are comfortable.